Financial Accounting & Reporting: Contingent Liabilities

This assignment presents a detailed analysis of contingent liabilities within the context of Australian accounting standards (AASB) and International Financial Reporting Standards (IFRS). The writer addresses two specific scenarios faced by Beachlife Ltd, a company engaged in sales of equipment. The first scenario involves recognizing intangible assets on the balance sheet and applying amortization. The second scenario tackles the complexities of warranty obligations and potential refunds under a sales contract with Goodsports Ltd. The analysis includes recommendations for financial reporting treatment, acknowledging the probability and estimation involved in classifying these liabilities.

Running head: FINANCIAL ACCOUNTING
Financial Accounting & Reporting
Name of the Student
Name of the University
Author Note

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718 Geelong Street
Melbourne, VIC 3000
Telephone [phone]
www.magentaandassociates.com.au
16 January 2018
Mr. Christopher Sampson
The managing Director
Beachlife Ltd.
Level 7, 927 William Street
Brisbane QLD 4000
Dear Christopher,
It has been a great pleasure in hearing from you and we thank you for the e-mail. We are
constantly trying to provide our clients with the best solution that is possible from our side so
that it can help in taking effective decisions. Like always, this time as well we will be providing
you with the best suggestions for the accounting problems and the issues that you have described

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in your mail and the suggestions will be provided to you as per the Corporation Act 2001, AASB
and the interpretations of the accounting issues by IFRS.
You must be knowing that the contingent liabilities are those that are the potential losses, which
might take place in the near future due to the non-occurrence or the occurrence of a particular
event or may be the result of a particular outcome. There are many examples that can be cited
under contingent liabilities such as investigations that are pending, claims that are legal and the
warranties of the products1. The liabilities that are contingent in nature have to be shown in the
financial statements provided the amount can be taken in to estimation. The estimation of the
amount that can be done will help the company in keeping a certain amount for the future
whenever that situation may arise within the company. According to AASB 137, Para 123, the
recognition of the liability will be the first obligation along with the probability that the outflow
of the resources that will help in benefitting the economy of the company needs to be settled
under the obligations. According to Para 29, it can be stated that severally and jointly the
company is liable for the obligations to be treated under the head contingent liability. The
development of these liabilities in an initial manner is not expected for the company. Thus, there
has to be continuous analysis for the determination of the outflow of resources that will help in
representing the benefits of the economy, which may or may not be probable. On the contrary,
the recognition of the provision in the company has to be done based on the present legal or
constructive obligation that may arise from the previous events and the obligatory amount can be
estimated in a reliable manner. The primary objective of the provision is that it has to adjust the
1 Gamper, Catherine, et al. "Managing disaster-related contingent liabilities." (2017).

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balance of the present year in an accurate manner so that the cost that belongs to the particular
year will result in misleading the status of finances if it had been accounted within the period.
Thus provision does not mean that it is a form of saving, which may seem at the first glance. It is
of the general recognition that it comes under the balance sheet under the head income statement
and in the part of expenses. Additionally, the major difference between contingent liabilities and
provision is that provisions are shown under the financial statements as liabilities where as the
liabilities that is contingent in nature is shown in the financial statements as liabilities, which is
disclosed as notes in the financial statements of the company2. If the probability of the liability is
high that is around 60 percent to 90 percent, then it can be placed under provisions in the
financial statement of the company. If the percentage of liability is more than five and less than
60 percent, then it can be presented through notes in the financial statements and if the
possibility of liability is less than 5 percent that the company does not need to take any action
regarding it.
Thus in compliance with the necessities of AASB 137 on Provisions, Contingent Liabilities and
Contingent assets, for the first issue that has been mentioned in the e-mail, we would suggest you
that the assets that are intangible in nature have to be transferred in the balance sheet so that the
necessary amortization and recognition can be done. With respect to this case, it can be seen that
the company has total assets that are intangible in nature worth $800,000, which is according to
the date 30th June, 2018, as it has been identified in the valuation of the directors. This shows that
the company has to change its policy that is present with accounting so that the recognition of the
cost can be developed through an internal manner. Additionally, the assets that are intangible in
2 Picker, Ruth, et al. Applying international financial reporting standards. John Wiley & Sons, 2016.

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nature need to have a useful life so that it can be amortized during the period that it has been
used. Therefore, the amount that has to be recognized for the purpose of amortization has to be
expected and needs to be reported at a cost of $800,000, which is less than the applicable
residual value for the assets.
In the second case, it can be seen that Beachlife Ltd had entered in to a contract of sales with
Goodsports Ltd on 1st December, 2017 with respect to an amount of $90,000 following which the
payment has been due on 30th December, 2017. Nevertheless, the delivery of the equipment by
Beachlife Ltd was on 10th December, 2017. With respect to the terms of the contract, Goodsports
Ltd had the provision of maintenance of the equipment for the first 12 months after the product
has been purchased by them. The amount that has been kept for maintenance of the whole year
by the company was $7,500. Nevertheless, with respect to the terms of the contract, if
Goodsports Ltd was not satisfied with the maintenance that was provided by Beachlife Ltd. they
are entitled for a refund of 15 percent of the price that has been paid, which comes to be $90,000
* 15 percent that is $13,500. Thus, in the present scenario Beachlife will show an amount of
$90,000 as sales under the statement of income for the sale of the equipment, as the amount was
received in the current year that is on 31st December 20173. Furthermore, the obligatory amount
of $7,500 as maintenance will be under the head contingent liability in the balance sheet and in
the income statement it will be recorded under provisions for the amount that has been estimated.
Additionally, the amount of $13,500 will be recorded as notes in the financial statement under
the heading of contingent liability due to the fact that the liability is not probable in nature.
3 Hendrickson, Joshua R. "Contingent liability, capital requirements, and financial reform." Cato J. 34 (2014): 129.

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In case you face any doubt regarding the suggestions that has been provided to you, please feel
free to contact us either by calling or sending an issue of uncertainty through e-mail.
Yours sincerely
Ms. Lisa Magenta
Manager
Magenta and Associates
Copy Emily Thompson
Enc Letter Writing Handout

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Reference List
Gamper, Catherine, et al. "Managing disaster-related contingent liabilities." (2017).
Hendrickson, Joshua R. "Contingent liability, capital requirements, and financial reform." Cato
J. 34 (2014): 129.
Picker, Ruth, et al. Applying international financial reporting standards. John Wiley & Sons,
2016.